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Stanley Works acquires HSM for $545 million

NEW BRITAIN, Conn.--North America's largest commercial security systems integrator just got bigger. Stanley Works announced in early January the completion of its purchase of HSM Electronic Protection for $545 million. HSM now becomes part of the new Convergent Security Solutions business unit of Stanley's Stanley Security Solutions division, along with the UK-based Blick (purchased in 2004) and all integration business.
The rest of the Security division will be wrapped into Mechanical Access Solutions, which will comprise all of hardware sales, along with builder's hardware, which hadn't previously been part of Stanley's security division.
Stanley Security Solutions now represents $1.4 billion in annual sales, with the Convergent unit pulling in $600 million. The $545 million price-tag, according to Stanley, represents multiples of 2.7x 2006 sales, 12x 2006 EBITDA, and 60x 2006 RMR.
In a conference call with investors, Stanley chairman and chief executive officer John Lundgren called the HSM buy a "game changing" event for the company, allowing for growth in security integration where it would have been difficult before. Because of single-digit operating margins, resulting from revenue generated almost exclusively from installation projects, the integration portion of the business was growing at only three percent annually. However, thanks to HSM's roughly $100 million commercial alarm monitoring business, and therefore recurring monthly revenue, electronic security will be a higher margin and scalable business for Stanley going forward.
HSM chief executive officer Jim Covert will leave the company and retire to New Zealand, according to Lundgren. Chief operating officer Tim Whall and chief technology officer Don Young will join Stanley Security Solutions.
The purchase price sent ripples through the security industry. Even Stanley executive vice president and chief financial officer Jim Lerie said, "these are not insignificant multiples," but, he said also, "this is an excellent business." That is a sentiment shared by many industry observers.
"Look at what's available in the market today," said Sandra Jones, head of consultant group Sandra Jones & Co. Buying HSM is "like buying the Hope Diamond, a one of a kind thing, and so it becomes much more valuable ... You're better off paying a high multiple for a good company than less for a company built on smoke and mirrors."
Jones singled out Tim Whall as one of the best executives in the industry.
Les Gold, a lawyer with Mitchell, Siberberg & Knupp who brought Stanley and HSM together roughly a year ago, echoed Jones's praise of Whall: "He's just as good as they come."
As for the price, Gold didn't find it high. "Four or five years from now, they're going to say the price they paid was more than reasonable. It's not the multiple you should look at, it's whether the price was fair. I think it was."
GTCR Golder Rauer and Jim Covert purchased HSM from Honeywell for $315.4 million in 2004, meaning they increased the company's value by $230 million, or 73 percent, in a little more than two years. With annual revenues of $200 million, 250 sales representatives, and a total of 1150 employees, HSM represented the fourth largest electronic security company in the United States at the time of the sale.